UNITED STATES DISTRICT COURT MIDDLE DISTRICT …€¦4 The Court does not accept and incorporate the...

1Because Plaintiff terminated its contract with LGI in June2004, Plaintiff does not pursue the fraudulent inducement claim toobtain rescission of contract as a remedy. Plaintiff seeks damagesfor misrepresentation and breach of contract, as well as thetrebling of the amount of commissions found to be due and untimelypaid under Tennessee statute. (Docket Entry No. 200, Plaintiff’sProposed Findings of Fact and Conclusions of Law at 40.)

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UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF TENNESSEE

NASHVILLE DIVISION

RESTAURANT SUPPLY SOLUTIONS, )INC., )

)Plaintiff, )

) No. 3:04-0786 v. ) JUDGE ECHOLS

)DEAN LEISCHOW, individually and )d/b/a THE LEISCHOW GROUP, INC., )LGI ENERGY SOLUTIONS, INC., )

)Defendants. )

MEMORANDUM

Plaintiff Restaurant Supply Solutions, Inc. (“RSSI”) brought

suit against Defendants LGI Energy Solutions, Inc. (“LGI”) and Dean

Leischow individually (“Leischow”) for breach of contract, fraud in

the inducement to contract, fraudulent misrepresentation, and

intentional, bad faith refusal to pay commissions, in violation of

Tenn. Code Ann. § 47-50-114, which, if proved, would entitle RSSI

to treble damages, attorney’s fees and court costs.1 Defendant LGI

brought a counterclaim against RSSI for breach of contract. The

Court conducted a bench trial in this case June 26 through July 3,

Case 3:04-cv-00786 Document 204 Filed 09/30/07 Page 1 of 47 PageID #: <pageID>

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2007. The Court now enters its Findings of Fact and Conclusions of

Law.

I. FINDINGS OF FACT

A. Adoption of factual findings

At the conclusion of the bench trial, the Court asked counsel

for the parties to submit proposed findings of fact and conclusions

of law. The Court has carefully reviewed its own notes taken

during the trial, as well as the trial transcript and the written

submissions of the parties.

The Court finds that a portion of the Plaintiff’s Findings of

Fact and Conclusions of Law (Docket Entry No. 200), which appear at

pages 1 to 29 of Plaintiff’s filing (up to the section on page 29

entitled, “Other Damages”), accurately reflects the testimony and

evidence presented at the bench trial as to the various subjects

addressed in pages 1 to 29, with two exceptions:

1. First exception concerning seven percent (7%) factor

The Court does not incorporate into this Memorandum two

sentences included in the Plaintiff’s proposed findings of fact in

the subsection entitled, “The Amendment to the Contract,” appearing

on pages 24 and 25 of Docket Entry No. 200. The Court does not

accept and incorporate the fifth sentence of the second paragraph

on page 24 which states: “The amendment never went into effect

because the sales numbers were never within 7% of projections.

(Ex. 125).” The Court also does not accept and incorporate the


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fourth sentence of the second full paragraph on page 25 which

states: “Mr. Leischow chose not to use the plus or minus 7%

provision in the amendment.”

The Court also does not incorporate into this Memorandum one

sentence in the subsection entitled, “The Termination.” In the

first full paragraph on page 26, the Court does not accept the

fourth sentence, which reads: “The 7% factor was no longer applied

after the termination. (Tr. p. 348).”

2. Second exception on failure of witnesses Kirkwood andBruce to testify

The Court does not accept and incorporate the last sentence of

footnote 12 appearing on pages 28-29 of Plaintiff’s submission.

(Docket Entry No. 200.) There is no evidence in the trial record

to substantiate the statement: “Both witnesses [Kirkwood and Bruce]

refused to testify on behalf of RSSI at this trial because of the

threat of enforcement of those contractual provisions by Mr.

Leischow.”

Other than the statements specified in the two exceptions

mentioned above, the Court hereby incorporates by reference into

this Memorandum Plaintiff’s statement of facts at pages 1-29.

The Court does not accept and incorporate the subsection

“Other Damages” at pages 29 to 37 of Plaintiff’s submission.

The Court accepts and incorporates by reference the subsection

entitled, “The Counterclaim” at pages 37 and 38 of Plaintiff’s

submission.


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The Court does not accept and incorporate the subsection “The

California Pizza Kitchen Contract” at pages 38 and 39 of

Plaintiff’s submission.

The Court also finds that paragraphs 13-21, 25-47, 60, and 71-

78 of the Defendants’ Proposed Findings of Fact and Conclusions of

Law (Docket Entry No. 201), accurately reflect the testimony and

evidence presented at the bench trial as to the various subjects

addressed in those paragraphs, and the Court hereby incorporates

those paragraphs by reference into this Memorandum.

Hereinafter the Court presumes the reader’s familiarity with

these findings presented by the parties and accepted by the Court.

B. Court’s additional factual findings

The Court now makes additional findings of fact. The Court’s

findings with regard to damages will be discussed later in this

opinion. To the extent the parties’ proposed findings of fact and

conclusions of law have not been accepted and incorporated herein

by reference or are different from those now entered by the Court,

the parties’ proposed findings and conclusions are hereby rejected.

1. Misrepresentations and omissions

The Court finds by a preponderance of the evidence that

Defendant Leischow, acting for himself and on behalf of Defendant

LGI, made a number of material misrepresentations and omissions of

fact to RSSI, Stapleton and Getreu before the parties entered into

the Work for Hire Agreement (“the Agreement”) in 2002. The Court


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finds that the testimony of Shane Stapleton and John Getreu was

more credible on the disputed issues than the testimony of

Defendant Dean Leischow. Specifically, Defendant Leischow:

(a) misrepresented the status of his business entity during

the negotiations leading up to the signing of the contract and at

the time that the Agreement was signed by RSSI. He also

misrepresented the status of his business entity to RSSI’s clients.

Defendant Leischow operated as a sole proprietor until he

domesticated Net Search, Inc. in Minnesota and changed its name to

LGI Energy Solutions, Inc. in May 2002. Leischow did not disclose

to RSSI, Stapleton, and Getreu before the Agreement was signed that

he was operating as a sole proprietor. Rather, he presented

Stapleton with a business card representing his company to be “The

Leischow Group, Inc.” and subsequently entered into the Work for

Hire Agreement with RSSI using the name, “The Leischow Group, Inc.”

The Court finds Defendant Leischow’s testimony that he had never

represented The Leischow Group, Inc. to be a Minnesota corporation

is not credible because he had entered into contracts with Lifetime

Fitness, Ulta, Inc., Enternext Group and Central Parking

Corporation as “The Leischow Group, Inc., a Minnesota corporation.”

The fact that Leischow later entered into the amendment with RSSI

as LGI Energy Solutions, Inc., does not obviate the effect of his

earlier misrepresentations.


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(b) Defendant Leischow misrepresented his business

capabilities. He represented that he was processing 150,000

utility invoices for clients per month, at a time when he was, in

fact, not processing any invoices. A subcontractor, Entech, Inc.,

processed approximately 150,000 utility invoices per month, but of

those, Entech processed less than one thousand invoices for LGI.

Entech and LGI had entered into an agreement that allowed LGI to

utilize Entech’s proprietary online system, but that agreement did

not give Leischow authority to misrepresent the capabilities of LGI

to prospective clients. Defendants Leischow and LGI did not have

the capability to process large numbers of utility invoices in-

house at the time the Agreement was signed, but they led RSSI and

prospective clients to believe that LGI had such capability.

Leischow led RSSI and its clients to believe that he had developed

SMRTPOWER when in fact Entech had developed that online system.

Contrary to Leischow’s representation, he did not possess a federal

trademark on SMRTPOWER.

(c) Defendant Leischow misrepresented his clientele to RSSI

and RSSI’s clients. He claimed that he was doing substantial

business with major companies such as Target, Walmart, General

Motors, Sony, Barclays Bank, Borders Books, Xerox and IBM when, in

fact, all of these clients were Entech’s and Leischow was not

deriving any income from any of them. He gave RSSI a false

customer list to pass on to their clients, a false list of


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“customer successes” and “additional customer successes,” and a

false list of references. He gave a false reference list to Jack-

in-the-Box.

(d) Defendant Leischow misrepresented the number of employees

he had, stating that he had twenty employees, including six tariff

analysts. Leischow knew that, at the time he signed the Agreement

with RSSI, he had only one assistant.

(e) Defendant Leischow misrepresented his financial status to

prospective customers, and in particular to Jack-in-the-Box. He

grossly overstated his actual and projected revenues in order to

land a contract with Jack-in-the-Box. The Court finds that the

testimony of Philip Williams from Jack-in-the-Box was more credible

than the testimony of Leischow concerning the misrepresentations

Leischow made to Williams to obtain the Jack-in-the-Box contract

and Williams’ reliance on those representations.

The Court further finds that Leischow and LGI continued to

make material misrepresentations and omissions to RSSI, Stapleton

and Getreu from the execution of the Agreement in early 2002

continuing to the time of trial. The Court finds that Leischow and

LGI did not disclose accurately the amount of revenue RSSI’s

clients generated for LGI, nor did they disclose accurately the

direct costs fairly attributed to RSSI business. The Court finds

that Leischow and LGI charged certain costs against RSSI, such as

a Leischow family vacation and construction expenses for Leischow’s


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personal home in Minnesota, when such costs did not in any way

relate to the direct costs of RSSI’s business. The Court further

finds that LGI and Leischow charged excessive travel expenses to

RSSI without proper business documentation of such charges and

without justifying the need for such expenses.

The Court finds that Defendant Leischow inflated LGI sales and

revenue figures in presentations and brochures given to prospective

RSSI clients in order to induce restaurant chains to enter into

contracts with LGI. Once contracts were signed, Defendant Leischow

and LGI did not deliver on the representations and promises they

made to the clients concerning the capabilities of SMRTPOWER and

LGI’s ability to process and pay utility invoices in a timely and

accurate manner. These failures at times also impacted LGI’s

ability to fulfill demand-side projects for clients. As a result,

excessive late fees were incurred for untimely payment of utility

bills which were charged to RSSI; some RSSI clients terminated

their contracts with LGI early, resulting in lost revenue; and RSSI

suffered damage to its reputation with its clients and lost future

business with them.

The Court finds that Defendant Leischow made all of these

misrepresentations knowingly and with fraudulent intent. The Court

further finds that even if the misrepresentations made to RSSI by

LGI were not known to be false, they were recklessly made without

regard to the truth. The Court also finds that RSSI, Stapleton,


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and Getreu relied on the material misrepresentations and omissions

of Leischow and LGI when RSSI agreed to enter into the Work for

Hire Agreement with LGI. The Court further finds that RSSI would

not have entered into the Agreement and its amendment but for these

material misrepresentations and omissions by Leischow and LGI. The

Court finds that RSSI has been damaged by these misrepresentations,

as set forth below.

The entire course of conduct in which Defendants Leischow and

LGI engaged casts a long shadow over Defendant Leischow’s trial

testimony. In light of the many misrepresentations and omissions

made by Leischow and LGI, the Court finds that the testimony of

Stapleton, Getreu, and Williams was more credible than the

testimony of Defendant Leischow.

2. Expert testimony

During discovery, Defendants LGI and Leischow failed to

produce to Plaintiff in response to discovery requests a large

number of important financial documents of LGI. Defendants’

failure to produce the requested financial documents obstructed

Plaintiff’s preparation for trial on an ongoing basis as trial

dates were continued. As trial dates approached, Defendants

produced some documents previously withheld and made payments to

Plaintiffs representing unpaid commissions. The lack of financial

documentation produced by Defendants made it particularly difficult

for Plaintiff’s expert to make accurate determinations about


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Defendants’ books and records and to make calculations of

Plaintiff’s damages.

On October 5, 2005, the Magistrate Judge granted Plaintiff’s

motion to compel and ordered Defendants to produce requested

documents. (Docket Entry No. 46.) Defendants did not comply with

the Magistrate Judge’s Order. On December 19, 2005, the Magistrate

Judge granted Plaintiff’s Rule 37 motion for sanctions (Docket

Entry No. 90) due to Defendants’ failure to comply with the Court’s

previous Order.

In the sanctions Order, the Magistrate Judge ruled that this

Court, as the finder of fact, should draw an adverse inference

against Defendants for their failure to produce a substantial

number of deposit tickets missing in the years 2004 and 2005 and

for their failure to produce copies of LGI’s canceled checks. (Id.

at 3-5.) Moreover, the Magistrate Judge ruled:

To the extent an expert witness testifies that additionalsource documents should have been maintained by thedefendants, the defendants will be subject to an adverseinference. To the extent other experts say that thesedocuments are unnecessary or not kept in the ordinarycourse of business, then the defendants may attempt torebut such an inference.

(Id. at 4.) Specifically with regard to American Express

statements and travel expenses, the Magistrate Judge ruled:

It does not appear that the defendants have produced theAmerican Express statements, and the defendants contendthat these are all the records they keep. The Courtcannot order the defendants to produce documents they donot have. The plaintiff’s expert is certainly free todraw such conclusions as are warranted from the lack ofjustification for expenses, and the defendants’ expert isfree to opine that such records are sufficient. The


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trier of fact may then decide whether expenditures arejustified or not.

(Id. at 5-6.)

Defendants LGI and Leischow have maintained throughout the

litigation that LGI does not in the ordinary course of business

keep back-up documentation for Defendant Leischow’s travel

expenses; rather LGI keeps and relies only on American Express

statements to substantiate Defendant Leischow’s travel.

Defendants’ expert, Harold Dahl, testified that he reviewed and

relied solely on the Defendants’ American Express statements and he

accepted at face value Defendant Leischow’s representations as to

the necessity of certain travel expenses and Defendant Leischow’s

decision to charge such costs against RSSI revenue. Neither

Plaintiff’s expert, Mr. Robert Whisenant, nor Defendants’ expert,

Mr. Dahl, were able to review any back-up documentation for

Defendant Leischow’s travel expenses.

In determining the amount of damages owed to the Plaintiff,

the Court will draw adverse inferences against Defendants to the

extent necessary to reach a decision due to their failure to

produce requested documentation in a timely manner so that

Plaintiff and its expert could prepare for trial. Plaintiff’s

expert prepared an initial expert report and a supplemental report

(Pl. Exs. 92 & 93) in an effort to address Defendants’ late

production of documents and the ever-changing picture of

Defendants’ business. (Trial Tr. 569-570, 572, 575.) Plaintiff’s


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damages figure continued to rise because documents produced late by

LGI impacted the damages calculation. (Trial Tr. 349-350, 358-

359.) Nonetheless, Defendants’ business remained a moving target.

Defendants’ recalcitrance in failing to produce documents has

created extreme hardship for Plaintiffs, their expert and this

Court in trying to understand what Defendants’ business documents

actually show. The Court finds that Defendants engaged in a

pattern of obfuscation before and during this litigation to prevent

Plaintiff and the Court from obtaining an accurate evaluation of

Defendants’ calculation of gross margin and commissions due to

Plaintiffs. Moreover, because the Court has already found that

much of Defendant Leischow’s testimony is not to be believed, the

Court will not accept at face value his explanation as to why

particular travel was necessary and why certain business expenses

were charged against RSSI revenue.

3. Gross margin

The Agreement of the parties did not define the term, “gross

margin.” Based on the testimony of Stapleton, Plaintiff’s expert

Robert Whisenant, and Defendants’ expert Harold Dahl, the Court

finds that “gross margin” meant sales revenue less direct costs.

4. RSSI’s customer support after terminating Agreement

Plaintiff presented a compilation of emails entitled “Account

Management Assistance Provided to LGI, October 2003 to December

2004.” (Pl. Ex. 128.) Stapleton testified that RSSI continued to


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provide management assistance and client support even after RSSI

terminated the Agreement with LGI. (Trial Tr. at 187.) The Court

finds that RSSI did provide management assistance and client

support while the Agreement and the amendment were in effect and

after RSSI terminated the Agreement and the amendment. The Court

does not credit Leischow’s testimony that RSSI abandoned its

responsibility to provide management assistance in 2004 and after.

Leischow specifically instructed Stapleton not to contact clients

directly shortly after RSSI terminated the Agreement and its

amendment. (Pl. Ex. 128, July 7 & November 19, 2004 emails.)

5. California Pizza Kitchen

After terminating the contractual relationship with LGI in

June 2004, in December 2004 RSSI entered into a separate agreement

with one of the clients they obtained for LGI, California Pizza

Kitchen (“CPK”). Karen Settlemyer of CPK contacted Stapleton and

Getreu and asked them to audit Defendant Leischow’s services

relating to a supply-side project LGI did for CPK. Specifically,

Settlemyer was concerned that numbers on savings reports she

received from LGI continued to change. She questioned the validity

of LGI’s charges to CPK for savings fees if late charges were

included. She asked RSSI to determine whether deposits were made,

but were not put into the correct accounting format for eventual

reimbursement. RSSI audited CPK’s bills from January 1, 2005

through July 2006. (Trial Tr. 318.)


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The Court finds that this contractual relationship between

RSSI and CPK strained LGI’s relationship with CPK. Although RSSI

had terminated its contract with LGI before accepting this audit

work for CPK, RSSI was nonetheless entitled to receive commissions

on CPK income until the expiration of the 36-month LGI-CPK contract

in late 2006. In conducting the audit CPK requested, RSSI did not

use any documents obtained from LGI, but Stapleton and Getreu

talked directly to CPK’s energy suppliers at CPK’s direction about

some of the invoices from LGI. RSSI expressed its opinion to CPK

as to the validity of information that CPK was receiving from LGI.

LGI claimed that an error appeared in RSSI’s audit for CPK.

LGI contacted RSSI numerous times asking for a correction to the

audit, but RSSI did not provide it. (Def. Exs. 293, 296-299.)

Based on the information RSSI provided, CPK eventually stopped

paying LGI from the fourth quarter of 2005 forward. As a result,

LGI filed an arbitration action against CPK claiming more than

$100,000. (Def. Ex. 300.) The claim eventually was settled with

CPK for $77,872.36. (Def. Ex. 325.) Approximately 45 days after

receiving the CPK settlement proceeds and shortly before a prior

trial date in this case, LGI paid RSSI $87,003.02. This figure

represented RSSI’s share of the settlement proceeds, plus

previously unpaid commissions LGI owed to RSSI.

The Court finds that RSSI’s conduct of the audit for CPK was

a breach of Section 1 of the Agreement and that LGI suffered


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damages as a result. The Court accepts LGI’s calculation of those

damages for breach in the amount of $23,429. (Def. Ex. 332.)

6. Buffalo Wild Wings

On March 21, 2003, Stapleton sent an email to his contact at

Buffalo Wild Wings, Kathy Sorenson, providing extensive information

about how LGI’s services could benefit the restaurant chain. (Pl.

Ex. 24.) Stapleton was not successful in convincing Buffalo Wild

Wings to enter into a contract with LGI at that time. Stapleton

told Defendant Leischow about his communications with Buffalo Wild

Wings. In February 2004, Leischow informed Stapleton by email that

Leischow would handle Buffalo Wild Wings and if Leischow needed

RSSI’s help he would ask for it. Leischow promised to keep

Stapleton informed about his progress with Buffalo Wild Wings, but

he did not do so. LGI entered into a contract with Buffalo Wild

Wings in late 2004, after RSSI terminated its contract with LGI.

RSSI did not receive any commission based on revenue LGI received

from Buffalo Wild Wings. (Trial Tr. 84-86.)

Because Stapleton made the initial sales overture to Buffalo

Wild Wings in 2003, the Court finds that the account is covered by

the Work for Hire Agreement. RSSI is entitled to commission on the

Buffalo Wild Wings revenue.

II. STANDARD OF PROOF

Plaintiff is required to prove each and every element of each

claim by a preponderance of the evidence. State by Humphrey v.


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Alpine Air Prods., Inc., 500 N.W.2d 788, 793 (Minn. 1993); McConkey

v. Continental Ins. Co., 713 S.W.2d 901, 904 (Tenn. Ct. App. 1984).

III. CONCLUSIONS OF LAW

The Agreement between RSSI and LGI provided that “[t]his

agreement shall be subject to the laws of the State of Minnesota.”

(Pl. Ex. 1 ¶ 11.) The Court will consider both Minnesota and

Tennessee law, as the law of these two states on the claims is

similar.

A. Misrepresentation

Under Minnesota law, the elements of fraudulent

misrepresentation are (1) a representation; (2) that is false; (3)

that pertains to a past or present fact; (4) that is material; (5)

that is susceptible of knowledge; (6) which the representer knew

was false or asserted as his or her own knowledge without knowing

whether it was true or false; (7) which the representer made with

the intent to induce another to act or be justified to act upon it;

(8) which did induce or justify another to act; (9) the person

acted in reliance upon the representation; (10) the person suffered

damage; and (11) the representation was the proximate cause of the

damage. Benson v. Rostad, 384 N.W.2d 190, 194 (Minn. Ct. App.

1986). Where a promise is concerned, there must be some

affirmative evidence that the promisor did not intend to perform at

the time he made the promise. Id.


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Under Tennessee law, the elements of fraudulent

misrepresentation are: (1) the defendant made a representation of

an existing or past fact; (2) the representation was false when

made; (3) the representation was in regard to a material fact; (4)

the false representation was made either knowingly or without

belief in its truth or recklessly; (5) plaintiff reasonably relied

on the misrepresented material fact; and (6) plaintiff suffered

damage as a result of the misrepresentation. Metropolitan Gov’t.

of Nashville and Davidson County v. McKinney, 852 S.W.2d 233, 237

(Tenn. Ct. App. 1992). If the claim is based on promissory fraud,

the misrepresentation must embody a promise of future action

without the present intention to carry out the promise. First

Nat’l Bank v. Brooks Farms, 821 S.W.2d 925, 927 (Tenn. 1991);

Stacks v. Saunders 812 S.W.2d 587, 592 (Tenn. Ct. App. 1990). The

terms, “intentional misrepresentation,” “fraudulent

misrepresentation,” and “fraud” are synonymous. Concrete Spaces,

Inc. v. Sender, 2 S.W.3d 901, 904 n.1 (Tenn. 1999).

The Court concludes that Plaintiff has proven its claim of

misrepresentation by a preponderance of the evidence whether

Minnesota or Tennessee law is applied. The Court expressly found

above that Defendant Leischow, for himself and on behalf of LGI,

made a number of material misrepresentations to RSSI, Stapleton and

Getreu prior to and during the contractual relationship between

RSSI and LGI.


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The Court concludes that the intentional representations

Defendants made (and which are specified above in this Memorandum)

were false or made with reckless disregard for the truth, pertained

to past or present facts, were material, were susceptible of

knowledge, were known by Defendants to be false or recklessly made,

were made by Defendants with the intent to induce RSSI to act or be

justified to act upon the representations, RSSI was so induced or

justified to act, RSSI acted in reliance upon the representations

and suffered damages, and the representations were the proximate

cause of RSSI’s damage.

RSSI relied not only on Defendants’ explicit representations,

but on Defendant Leischow’s guidance and instruction when he made

presentations to prospective clients and included in the

presentations to those clients the same misrepresentations he made

to RSSI, Stapleton and Getreu. Not knowing at the time that

Defendants’ representations were untrue, Stapleton and Getreu made

the same misrepresentations when they made presentations to

prospective clients.

Defendants also made a misrepresentation to RSSI that LGI

could handle any business that RSSI could bring to the table.

Defendants knew when they entered into the Agreement with RSSI that

LGI did not process and pay even one customer utility bill; rather,

Entech processed less than 1,000 utility bills for LGI’s customers

and LGI was not then in the business of paying customers’ utility


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bills. Being unfamiliar with the needs of the food service

industry, Defendants had absolutely no basis upon which to

determine whether Entech would be able to fulfill the needs

presented by RSSI clients. The Court concludes that at the time

the misrepresentation was made, Defendants were ignorant of the

true needs of the clients RSSI brought to the table and ill-

prepared to meet the challenges presented by those clients. Under

the facts and circumstances, the misrepresentation was recklessly

made by Defendants without regard to the truth, knowing RSSI would

rely upon it.

B. Breach of contract

Under Tennessee law, the essential elements of any breach of

contract claim include: (1) the existence of an enforceable

contract; (2) nonperformance amounting to a breach of the contract,

and (3) damages caused by the breach of the contract. Ingram v.

Cendant Mobility Fin. Corp., 215 S.W.3d 367, 374 (Tenn. Ct. App.

2006). A plaintiff must prove similar elements under Minnesota

law. Industrial Rubber Applicators, Inc. v. Eaton Metal Prods.

Co., 171 N.W.2d 728, 731 (Minn. 1969), overruled on other grounds,

Standslast v. Reid, 231 N.W.2d 98 (Minn. 1975).

1. The Work for Hire Agreement

Effective February 6, 2002, RSSI and LGI entered into the Work

for Hire Agreement (“the Agreement”), an open-ended contract. (Pl.

Ex. 1.) The parties do not dispute that they entered into this


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Agreement or that it is an enforceable contract. Although the

parties exchanged versions of this Agreement before its execution,

Defendant Leischow drafted most of the contract language. The

Court construes any ambiguities in the Agreement against its

drafter, Leischow. See Catlett v. Chinery, 952 S.W.2d 433, 436

(Tenn. Ct. App. 1997); Benson v. City of Little Falls, 379 N.W.2d

711, 713 (Minn. Ct. App. 1986).

The Agreement provided:

1. DESCRIPTION OF SERVICES. Beginning on February 6,2002, RSSI will provide the following service,(collectively, the “Services”): to include but notlimited to, Sales of LGI’s Utilities Online Bill Auditingand Tracking System, Utility Procurement Services,management of energy brokers and Facility EngineeringAssessments. (For the purposes of this agreement,“Utilities” shall mean Electric, Gas and Waterutilities). RSSI will be required to provide ongoingaccount targeting, reporting and management assistancewith all sales made by RSSI to customers in theFoodservice Industry as indicated on Addendum A.Addendum A lists chain restaurant accounts anddistributors covered by this agreement as agreed to byboth parties. Periodically, Addendum A will be reviewedto either add or delete the accounts listed onAddendum A. A forty-eight (48) hour period will beenacted to enable LGI to gather information from itscompany concerning any current involvement or activity itmay have with all possible future additions toAddendum A. RSSI will represent LGI to the FoodserviceIndustry. LGI will have control over how its servicesare represented by RSSI.

(Pl. Ex. 1, ¶ 1.) The Agreement further provided that LGI would

pay RSSI as follows:

2. PAYMENT FOR SERVICES. LGI will pay RSSI a commissionfee based upon fifty percent (50%) of the Gross Marginderived on the sales of LGI’s products and services(unless specifically noted and mutually agreed to in


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advance on an account sales margin schedule basis) lessany previously issued retainers. (Example: Sale price of$15.00 per meter carries a gross margin of 50% or $7.50.RSSI’s commission would be 50 percent of $7.50, whichequals $3.75). LGI will detail a sales margin schedulefrom which commissions will be based and provide it toRSSI. Should the cumulative monthly commissions be lessthan $5000 per month, LGI will pay RSSI the amount of theshortfall to be deducted from future commissions.(Example: RSSI commission for first and second month is$0.00 and LGI pays a retainer of $5000.00 in each ofthese two months. In the third month RSSI’s commissiondue is $12,000.00, LGI pays RSSI $5,000.00, $12,000.00less previous retainers of $10,000.00, plus and (sic)additional retainer amount of $3,000.00. Had the thirdmonth’s commission due RSSI been $16,000.00, LGI shallpay RSSI $6000.00, $16,000.00 less the previous retainerstotaling $10,000.00 of commission due and $0.00 inretainer.) Commissions will be earned by RSSI in themonth the revenue from the sale is received by LGI.Payment of all retainers will be contingent upon RSSImeeting monthly activity levels, which shall be mutuallyagreed upon in advance between LGI and RSSI.Compensation shall be payable monthly, 10 days after theend of each month. In the event that an account does notpay LGI for the service, RSSI will not be compensated forthe unpaid portion of the invoice.

(Pl. Ex. 1 ¶ 2.)

The Agreement did not require LGI or Leischow to provide any

particular services or quality of services, nor did the contract

define the term, “gross margin.” The interpretation of a contract

is a question of law and depends on the intent of the parties.

Pitt v. Tyree Org. Ltd., 90 S.W.3d 244, (Tenn. Ct. App. 2002);

Rosenberg v. Heritage Renovations, LLC, 685 N.W.2d 320, 324(Minn.

2004). The Court concludes the parties intended that Defendants

LGI and Leischow would provide RSSI clients with the products and

services actually sold to them, including timely and accurate


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utility bill invoice processing and payment and use of SMRTPOWER.

The parties intended that “gross margin” meant sales revenue less

direct costs. As the parties also agreed, LGI charged direct costs

against RSSI in the month the costs were incurred and RSSI earned

commissions in the month revenue was paid. A commission payment

was due to be paid ten days after the end of the month in which the

commission was earned.

Pursuant to the Agreement, RSSI was to sell LGI’s products and

services to the food service industry, and RSSI was successful in

doing so. LGI signed contracts with RSSI clients AFC Enterprises,

Bruegger’s, Cooker’s, California Pizza Kitchen, Jack-in-the-Box,

and Outback Steakhouse of Florida. RSSI also made the initial

contact with Buffalo Wild Wings. Even after RSSI terminated the

Agreement in June 2004, Stapleton and Getreu continued to provide

support to RSSI clients until Leischow told them to stop making

such contacts. The Court concludes that RSSI fulfilled its

obligations under the Agreement.

The Court concludes that Defendants LGI and Leischow breached

the Agreement in the following ways:

(1) Defendants failed to provide the customers in RSSI’s

portfolio with many of the products and services for which they

contracted. By terminating the relationship with Entech and moving

services in-house, Defendants destroyed the infrastructure to

support the products and services RSSI sold to its customers.


23

SMRTPOWER was no longer available. The processing of invoices

slowed down. Leischow hired another subcontractor, YSK, to scan

invoices and electronically send them to India for keying to make

them uniform. There were problems interfacing with India, resulting

in customer complaints, invoices disappearing, late charges being

imposed on customers by utility companies, and shut-off notices

being sent. Unpaid invoices resulted in two or three Jack-in-the-

Box restaurants being closed, one Outback location closed, and one

Outback location’s water being temporarily shut off. (Pl. Exs. 28,

31, 34, 36, 37; Trial Tr. 132-153.)

(2) LGI’s termination of Entech resulted in expenses for

system development to take invoice processing in-house at LGI.

These expenses were not contemplated by RSSI and the Defendants at

the time the Agreement was signed, and the parties agreed that

developmental costs for the in-house system were not going to be

charged to RSSI revenue to reach gross margin. (Trial Tr. 112-

113.) These expenses were charged against RSSI revenues although

RSSI had no control over the decision to dismiss Entech.

(3) Dissatisfaction with Defendants’ services resulted in the

early termination of the contracts with Bruegger’s, Cooker’s, AFC

Enterprises and Jack-in-the-Box, resulting in loss of revenues.

Due to Defendants’ poor performance, CPK’s fee payments were

reduced.


24

(4) None of the contracts with RSSI clients were renewed due

to Defendants’ poor performance.

(5) After Defendants began itemizing costs and expenses to be

deducted from revenues from the RSSI portfolio, Defendants refused

to provide any documentation to verify those costs other than the

commission statements created and provided to RSSI.

(6) Defendants kept increasing the categories of costs

included as direct costs, including employees’ salaries, outside

contractors, Federal Express charges, and travel expenses, contrary

to the parties’ intent when the Agreement was signed. Defendants

charged personal expenses against RSSI revenues, including a family

vacation to Florida in 2002.

(7) Defendants charged all of the late fees incurred on the

clients’ utility invoices against RSSI revenues to reduce the

commission fees. To the extent a customer did not send a bill on

time, the late fee should have been the customer’s responsibility.

If the utility did not send the bill in time to be timely paid, it

should not charge a late fee. If the late fee was due to a delay

in processing or an error by LGI, LGI should have paid the late

fee.

(8) Defendants underreported revenues received from RSSI

clients.

(9) Defendants failed to timely pay commissions owed to RSSI.

Pursuant to the Agreement, commissions were to be paid ten (10)


25

days after the end of the month in which the commission was earned

by the receipt of revenue.

2. The amendment to the Work for Hire Agreement

By July 2003, sufficient revenue was paid to Defendants by

RSSI clients to permit RSSI to repay to LGI all previous monthly

retainers (or “draws”) that it had received. RSSI paid off all

retainers in the amount of $57,594.08 to LGI by the end of

September 2003. Pursuant to the Agreement, the parties had

expected that when the retainers were repaid, Leischow would

calculate LGI’s true gross margin for the services and products

furnished to the customers acquired by RSSI and give RSSI an actual

gross margin figure, and each month LGI would pay RSSI fifty

percent (50%) of the gross margin. Between inception of the

Agreement in February 2002 and September 2003, Leischow did not

provide RSSI with details as to how he calculated gross margin in

spite of repeated requests for the information. The commission

statements RSSI received showed 50% cost and therefore 50% gross

margin, but the unstated calculations did not appear to be

consistent. RSSI was given half of the gross margin stated by LGI

up to September 2003, but Leischow did not provide any clear

explanation or documentation to support the 50% gross margin.

(Trial Tr. 389.)

In October 2003, LGI paid RSSI 50% of a stated gross margin of

27.39%. At that time, Leischow notified Stapleton and Getreu that


26

the income and gross margin was running lower than expected.

Leischow sought a reduction in the commission percentage LGI would

pay to RSSI. Although RSSI was under some pressure as a result of

Leischow’s demand to lower the commission rate, Stapleton and

Leischow engaged in extensive negotiations in November and December

2003 in an effort to reach an agreement. The parties anticipated

that Jack–in-the-Box would begin to make large fee payments in

March 2004 as a result of substantial utility cost savings

effectuated by LGI. (Def. Ex. 235.) In an attempt to bring these

protracted negotiations to a conclusion, Leischow submitted a

proposal to RSSI which the parties executed as a written letter

Amendment to the Agreement effective December 16, 2003. The

Amendment provided as follows:

This letter is confirmation of how we will specificallyhandle our commission payments to RSSI as we move forwardfor management fee and savings fee determinations.

LGI will pay commissions based upon a flat margin of 30%to RSSI beginning December 1, 2003. This commission ratewill continue through the month of February providedthere are no substantial (7%) changes to the RSSI accountportfolio. Should there be substantial (7%) changes tothe projected Revenue; LGI will recompute the marginlevel to determine if a change in Margin % is warranted.When and if the management fee and the savings revenuesare as projected (See attached revenue projections,Book3.xls delivered by LGI to RSSI on November 18th) forMarch, the existing RSSI account portfolio margin willincrease to approximately 50% and if this proves to beaccurate, at that time LGI will change the RSSIcommission payment plan to a flat rate of 25% of sales onall accounts, from that date forward. Demand projectsare paid at 50% of the predetermined gross margin rate.All other provisions of Paragraph 2, Payment ForServices, are still in effect.


2The CPK contract began January 1, 2004 and was considered tobe new business that was paid at the 25% commission rate.

27

Any new business developed will pay at the rate of 25% ofsales effective as of December 1, 2003.

(Pl. Ex. 2.) Thus, RSSI was to be paid at a flat rate of 15% of

sales from December 2003 through February 2004, without taking

direct costs into consideration, so long as revenues received on

the RSSI portfolio were within seven percent (7%) (above or below)

of the projected revenues as shown in the spreadsheet attached to

the amendment. In the event actual revenues were more than 7%

above or below projected revenues, Leischow would recompute the

margin levels to determine whether a change in the percentage of

sales paid as commission to RSSI was justified. In such an event,

any change in the rate of commission payments was left to

Leischow’s sole discretion. However, the parties intended that any

direct costs charged against RSSI’s commissions would be directly

incurred in conjunction with the RSSI portfolio.

Although Stapleton testified at trial that he believed this

amendment was not enforceable because he signed it under duress,

the Court concludes that Stapleton participated in the negotiations

leading up to the amendment, and he knowingly and voluntarily

entered into the amendment on behalf of RSSI in order to achieve an

anticipated commission rate of twenty-five percent (25%) of sales

starting in March 2004.2 The benefit to RSSI of the potential 25%

commission rate on the RSSI portfolio starting within three months


3LGI retroactively made a commission payment to RSSI so thatthe November 2003 commission was based on an assumed 30% of grossmargin, or 15% of sales.

28

and continuing for the life of those contracts, along with RSSI’s

agreement to redouble its efforts to sell to food service clients

for LGI starting in December 2003, supplied the necessary

consideration for the amendment. In his own communications with

Defendants, Stapleton acknowledged that he had agreed to the

amendment. (Pl. Ex. 73; Def. Ex. 334.) The Court concludes the

amendment is enforceable and that it took effect on December 1,

2003.

From December through February 2004, LGI paid RSSI the flat

15% of sales commission rate3 and did not itemize direct costs and

calculate gross margin, although during this period RSSI did not

provide LGI with 2004 sales target information as requested. LGI

did not increase the commission rate to 25% of sales in March 2004

because Jack-in-the-Box refused to begin paying the anticipated

savings fees.

Once RSSI terminated the Agreement and its amendment in late

June 2004, however, Defendant Leischow recalculated gross margin

for the months of January 2004 and after. In doing so he charged

as direct costs to RSSI his salary and that of his assistant, even

though the parties had agreed that such salary expenses would not

be charged to RSSI. Leischow testified that he charged the

increased expenses because Stapleton and Getreu were no longer


29

selling LGI’s services to clients and Leischow was forced to take

over the sales function of their jobs. Leischow applied 90% of his

internal labor costs to RSSI’s portfolio. RSSI had previously

accepted this 90% attribution figure. (Pl. Ex. 2, attachment.)

Leischow also charged against RSSI commissions additional business

expenses which dropped RSSI’s commission payments substantially

from June 2004 and after. (Pl. Ex. 139.)

Under the amendment, Leischow in his sole discretion could

have recalculated gross margin starting in March 2004 when Jack-in-

the-Box failed to begin paying anticipated utility savings fees,

rather than paying RSSI 15% of sales through May 2004. If Leischow

was concerned that RSSI was not bringing in new clients, Leischow

could have demanded that RSSI perform the Agreement or Leischow

could have demanded renegotiation of the Agreement or negotiation

of another amendment to the Agreement. However, neither the

Agreement nor its amendment permitted Leischow to act punitively

toward RSSI by going back to January 2004 and recalculating gross

margin, charging against RSSI costs that the parties had not agreed

could be so charged. Leischow attributed as many expenses as he

could find to lower RSSI’s commissions. Leischow’s conduct

breached the Agreement and its amendment, and his conduct had the

effect of reducing the amount of commissions LGI paid to RSSI for

the month of June 2004. Because Leischow continued to charge many


30

expenses to RSSI after June 2004 as well, RSSI commissions dropped

in the ensuing months also.

C. Defendant Leischow’s personal liability

The Court determines that Defendant Leischow will be held

jointly and severally liable with Defendant LGI. The Court relies

on Brungard v. Caprice Records, Inc., 608 S.W.2d 585, 588 (Tenn.

Ct. App. 1980), and Jasper Aviation, Inc. v. McCollum Aviation,

Inc., 497 S.W.2d 240, 242 (Tenn. 1972), which state:

One, who in the course of his business, profession oremployment, or a transaction in which he has a pecuniaryinterest, supplies false information for the guidance ofothers in their business transactions, is subject toliability for pecuniary loss caused to them by theirjustifiable reliance upon such information if he fails toexercise reasonable care or competence in obtaining orcommunicating the information.

“In effect, the scienter requirement of common law deceit has been

replaced by a reasonable care standard in business transactions.

[citation omitted] Thus the plaintiff only needs to prove that the

misrepresentations were made negligently.” Brungard, 608 S.W.2d at

588. Here, the Court has determined that Defendant Leischow’s

misrepresentations were intentional in that he made them knowingly,

without belief in their truth, or recklessly, careless whether they

were true or false. See id. See also Universal Lending Corp. v.

Wirth Companies, Inc., 392 N.W.2d 322, 326 (Minn. Ct. App. 1986)

(noting corporate officer may be held liable in tort if the officer

actually participated in the tortious transaction).


31

Moreover, at the time Defendant Leischow made the

misrepresentations which induced RSSI to enter into the Agreement,

Leischow knew he was operating as a sole proprietor doing business

as The Leischow Group, Inc. That entity was not then, and never

was incorporated. See Woodall v. Underwriters at Lloyds, London,

2007 WL 1231688 at *2 (E.D. Tenn. 2007) (“The individual who does

business as a sole proprietor under one or several names remains

one person, personally liable for all his obligations.”) Defendant

Leischow is personally liable for his own acts and those of

Defendant LGI.

D. LGI’s counterclaim

The law set forth in section B. above on breach of contract

applies equally to Defendants’ counterclaim for breach of contract.

The Court concludes under the facts determined above that

Defendants proved by a preponderance of the evidence their breach

of contract counterclaim against RSSI. As found in section I.B.5.

above, LGI is entitled to $23,429 in damages on this claim.

E. Damages

With regard to fraud, the injured party should be compensated

for the actual injuries sustained by placing him in the same

position he would have occupied had the wrongdoer performed and the

fraud not occurred. Shahrdar v. Global Housing, Inc., 983 S.W.2d

230, 238 (Tenn. Ct. App. 1998). Under Minnesota law, “[t]he out-

of-pocket rule allows damages to be recovered which are the natural


32

and proximate loss sustained by a party because of reliance on a

misrepresentation. Under this rule it is not a question of what

the plaintiff might have gained through the transaction but what

was lost by reason of defendant's deception.” Lewis v. Citizens

Agency of Madelia, Inc., 235 N.W.2d 831, 835 (Minn. 1975).

“The purpose of assessing damages in the event of a breach of

contract is to place the injured party in the same position it

would have been in had the contract been fully performed.”

Metropolitan Gov’t. of Nashville and Davidson County v. Cigna

Healthcare of Tennessee, Inc., 195 S.W.3d 28, 35 (Tenn. Ct. App.

2005); Kellogg v. Woods, 720 N.W.2d 845, 853 (Minn. Ct. App. 2006).

“Whether the theory of recovery is breach of contract, intentional

misrepresentation, or promissory fraud, if the damages claimed

under each theory overlap, the Plaintiff is only entitled to one

recovery.” Allied Sound, Inc. v. Neely, 909 S.W.2d 815, 821 (Tenn.

Ct. App. 1995); Brooks v. Doherty, Rumble & Butler, 481 N.W.2d 120,

128 (Minn. Ct. App. 1992) (“In order to recover under theories of

both contract and tort, appellant had the burden of proving

separate damages for fraud and for breach, lest the damage award be

duplicative.”)

Although RSSI may have suffered damages proximately caused by

Defendants’ fraud that are different from the damages suffered as

a result of breach of contract (i.e., loss to reputation, loss to

future business), RSSI made no effort to quantify any such damages.


33

RSSI seeks unpaid commissions, treble damages under Tenn. Code Ann.

§ 47-50-114(d) for bad faith failure to make commission payments in

a timely manner, lost revenues, and prejudgment interest.

1. Plaintiff’s calculation of damages

Plaintiff RSSI presented two separate damages calculations:

one completed by Plaintiff’s expert Robert Whisenant, and one

completed by John Getreu for RSSI. These two calculations are not

themselves consistent, and each of them is based on critical flaws.

a. Robert Whisenant’s calculation

The Court rejects Mr. Whisenant’s calculation (Pl. Exs. 92 &

93) for several reasons. First, Mr. Whisenant testified that LGI

failed to produce important documentation that would have allowed

him to reconcile bank deposits and evaluate costs that LGI charged

against RSSI revenue. (Trial Tr. 570-575.) Although Mr. Whisenant

tried to apply uniform standard of accounting principles to

determine the gross margin, he could not do so because of the state

of the books and records that LGI turned over in discovery. (Trial

Tr. 580.) He was unable to calculate actual gross margin due to

the lack of information, and even if he had been able to do so, the

resulting figures would have been very subjective. (Trial Tr.

581.)

Second, although LGI produced additional information after Mr.

Whisenant completed his supplemental report in April 2007,

Plaintiff’s counsel did not provide that additional information to


34

Mr. Whisenant so that he could further update his analysis. (Trial

Tr. 593.)

Third, as instructed by Plaintiff’s counsel, Mr. Whisenant

applied 50% gross margin throughout the period in question even

though he read the amendment to the Work for Hire Agreement and

recognized that the amendment did not state that gross margin would

be calculated at 50% after December 1, 2003. (Trial Tr. 596-597.)

Fourth, LGI charged direct costs to RSSI in the month they

were incurred (on an accrual basis) and counted collections of

revenue in the month received (on a cash basis). Because Mr.

Whisenant did not have proper documentation, he could not reconcile

those books of LGI that he did have. (Trial. Tr. 598.)

Fifth, Mr. Whisenant assumed that each RSSI customer contract

extended to the full 36-month life of the contract. He did not

take into account that some of the contracts terminated early.

(Trial Tr. 601-603.) For all of these reasons, the Court finds

that Mr. Whisenant’s expert findings and conclusions are not

reliable and the Court does not rely upon them.

b. RSSI’s calculation

The Court also rejects the greater part of RSSI’s calculation

because it is based on two fundamental assumptions with which the

Court does not agree.

Because LGI did not produce certain documentation during

discovery, RSSI was forced to find some method by which to estimate


35

its damages. RSSI did not wish to accept LGI’s position that 90%

of LGI’s internal labor costs were attributable to RSSI business

because to accept this figure raises expenses and lowers profit and

results in less commission to RSSI. (Pl. Ex. 122.) It is

important to note that, at the time RSSI conducted its own audit of

LGI in July-August 2004 after terminating its contract with LGI in

June 2004, RSSI itself applied the 90% internal labor figure,

observing in its audit that the figure had been agreed to by the

parties. (Def. Ex. 253, Footnotes: “Internal Labor excludes Dean

and Vicky, per agreement between parties. Labor adjusted to 90%

for covered employees, per agreement between parties.”) The 90%

figure first appeared in the footnotes to the schedule of projected

gross margin on RSSI’s portfolio that was attached to the amendment

to the Work for Hire Agreement. (Pl. Ex. 2.)

In an effort to circumvent RSSI’s earlier agreement to the 90%

internal labor figure, Stapleton and Getreu testified at trial that

RSSI used, but did not accept the 90% figure, in preparing its own

audit. (Trial. Tr. 312-313, 398-400.) The Court rejects such

testimony because it is in direct contradiction to RSSI’s earlier

agreement to use the 90% figure.

To get around this quandary in preparing for the bench trial,

RSSI focused on Leischow’s representation that LGI processed

150,000 utility invoices for clients per month. The trial record

now makes clear that Leischow’s representation was not true.


36

Nonetheless, RSSI determined the number of utility invoices LGI

actually processed for RSSI clients and compared that number as a

percentage to the 150,000 invoices Leischow claimed he was

handling. Thus, RSSI determined that only 9.77% of LGI’s internal

labor costs should be charged to RSSI business rather than 90% as

the parties agreed. This contradicts LGI’s evidence that 90% of

its internal labor cost is attributable to RSSI. (Trial Tr. 733-

739; Def. Ex. 324.)

Additionally, RSSI obtained an affidavit that Leischow

submitted in related litigation in Minnesota in which Leischow

claimed that he managed 13,000 units. RSSI calculated the number

of units attributable to its clients and compared that figure to

Leischow’s claimed 13,000 units to reach the conclusion that RSSI

was responsible for 21.52% of LGI’s total units. (Trial Tr. 332-

333, 352, 400-408, Pl. Ex. 114.) The Court rejects this analysis

as well. RSSI produced no evidence to substantiate the 13,000

figure, and Leischow testified that the total number of locations

LGI manages may not utilize the same bill paying and processing as

is done for RSSI clients. LGI provides various services to various

clients. (Trial Tr. 739-740.)

Stapleton testified that RSSI does not know what percentage

of LGI’s internal labor was dedicated to RSSI’s accounts, but 9.77%

was the best number RSSI could come up with to show the amount of

time LGI spent on RSSI’s accounts. (Trial Tr. 334-335.) The


37

difference in the two percentages advanced by the parties (9.77%

vs. 90%) would have a huge impact on the damages calculation.

The Court rejects RSSI’s approach to the calculation of

damages because it is not supported by the evidence. The Court

will accept certain aspects of RSSI’s calculation of damages as

explained below.

2. LGI’s calculation of damages

LGI presented a damages calculation through its expert, Harold

Dahl. According to Mr. Dahl, from the inception of the Work for

Hire Agreement through October 2003, the “commission” payments LGI

paid to RSSI were predicated on retainers, or draws, and not on a

calculation of actual gross margin. During those months, gross

margin was actually negative because early on the costs exceeded

the cash received. Nonetheless, LGI paid RSSI $5,000 per month no

matter what actual gross margin was for that month. (Trial Tr.

790.) LGI does not seek reconciliation of these figures, and the

Court finds that RSSI is not entitled to any additional commissions

for this period.

Mr. Dahl calculated damages for the period March 2004 to April

2007. The summary of his calculation is found at Exhibit H within

Defendant’s Exhibit 326. Although Mr. Dahl testified about a

number of figures and exhibits, the Court understands his testimony

to rest on the following premise: In March 2004, the parties

expected that Jack-in-the-Box would begin paying substantial


38

utility savings fees (approximately $134,000 per month); Jack-in-

the-Box failed to begin paying the utility savings fees as

expected, but Jack-in-the-Box did finally pay the fees owed to LGI

as a result of the arbitration award of $1,879,354, albeit later

than on the due date; therefore, to ease calculation of damages,

the parties and the Court should assume that Jack-in-the-Box began

paying the savings fees as expected in March 2004; and LGI’s

ultimate receipt of the Jack-in-the-Box revenue triggered the

provision in the amendment to the Work for Hire Agreement requiring

LGI to pay RSSI commissions of 25% of revenue from March 2004

forward. By calculating 25% of cumulative revenue as provided in

the amendment, the need to calculate actual gross margin is

obviated. This was the obvious intent of the parties at the time

the amendment was agreed upon. Moreover, additions and deductions

can be made to the commission figures to resolve other disputed

issues.

Considering the extremely complicated record in this case, the

Court agrees with Mr. Dahl that this approach should be taken. The

amendment to the Work for Hire Agreement permitted LGI to

renegotiate gross margin for March 2004 forward if RSSI revenues

were not within 7% of the projection. When this target was missed,

Leischow did not seek a renegotiation of the commission rate.

Rather, in June 2004, he, in his own discretion, calculated gross

margin back to January 2004 and started charging his and an


39

assistant’s salaries and other additional expenses to RSSI

revenues. The Court has already found that Leischow’s method was

arbitrary and improper under the evidence. Because LGI’s own

expert suggests that the 25% of revenue calculation be used, the

Court finds under all of the circumstances that this is the correct

approach.

Although the Court agrees with his general methodology, it

does not, however, follow Mr. Dahl’s Exhibit H in all respects.

First, the Court calculates the initial amount of cumulative

revenue differently because the Court treats the Jack-in-the-Box

arbitration award separately and does not include it in the initial

cumulative revenue figure for LGI. Second, the Court finds that

LGI is not entitled to any of the “mitigating expenses” in the

amount of $145,949 charged against RSSI’s commissions for

abandoning their customers. The Court has found that Stapleton and

Getreu continued to support RSSI clients even after they terminated

their Agreement with LGI, and they would have continued to do so if

Leischow had not forbidden them to contact clients as early as July

2004. Thus, the Court sees no basis upon which to award LGI

“mitigating expenses” which were supposedly incurred by LGI to

“take up the slack” after RSSI terminated its Agreement. Many of

these expenses LGI brought upon itself as a result of its own

selfish conduct.


40

Because the Court will treat the Jack-in-the-Box arbitration

award separately, the Court will consider in connection with that

calculation deductions for the costs incurred by LGI in obtaining

the award. The Court finds that the proper figure for the Jack-in-

the-Box arbitration award is the amount that was actually paid to

LGI, which included interest ($1,879,354). There is no dispute

that RSSI brought Jack-in-the-Box to LGI as a customer, and RSSI is

entitled to its share of the arbitration award and the interest

allowed, the same as LGI. The interest portion of the award should

not benefit LGI only.

The Court further finds that $192,222 should be deducted from

the arbitration award to account for legal expenses and travel

costs. To reach this figure, the Court finds that $8,114 of the

$196,788 in expenses claimed by LGI as incurred in obtaining the

Jack-in-the-Box award were the result of non-Jack-in-the-Box legal

fees. As such, that amount will be deducted ($196,788 less $8,114

= $188,674). Travel expenses in the amount of $3,548 will be

allowed ($188,674 + $3,548 = $192,222). Accordingly, the gross

margin on the Jack-in-the-Box award is $1,687,132 ($1,879,354 less

$192,222). RSSI is entitled to 25%, or $421,783. To avoid double-

counting, the Court will add $127,253 to RSSI’s entitlement, which

represents legal expenses previously charged against RSSI

commissions, and $3,548, which represents the travel expenses

previously charged against RSSI commissions (Pl. Ex. 110) for a


41

total of $552,584. The Court will subtract the amount of $255,332,

which represents the amount that LGI had already paid to RSSI in

commission from the Jack-in-the-Box award. This results in RSSI’s

entitlement to an additional $297,252 from the Jack-in-the-Box

award ($552,584 - $255,332 = $297,252).

The Court rejects Mr. Dahl’s inclusion of $99,296 for expenses

Leischow claims he incurred in connection with the arbitration of

the CPK contract. Leischow arbitrarily determined this figure.

Mr. Dahl simply took the figure at face value because it was

supplied by Leischow and applied it in his calculation. Because

the figure is not substantiated, the Court will not use it. The

Court does find in LGI’s favor on the issue of RSSI’s interference

with the CPK contract; however, the Court adopts and applies LGI’s

loss figure of $23,429 for RSSI’s breach. (Def. Ex. 332.)

The Court finds that RSSI is entitled to $14,367 for

commissions earned from Buffalo Wild Wings (25% of $57,466). The

Court will also give RSSI credit for $131,233 in lost revenue for

the early cancellation of the AFC, Outback, Bruegger’s and Cooker’s

contracts. (Pl. Ex. 132.) The Court will not award RSSI $176,176

for unreported revenue (Pl. Ex. 132) because RSSI did not carry its

burden of proof to show how this amount was calculated. The Court

will deduct the June 2007 payment LGI made to RSSI in the amount of

$87,003, and the amount LGI is due on its counterclaim of $23,429.


42

Finally, RSSI seeks statutory trebling of $306,990 in

commissions which LGI failed to pay in a timely manner in bad

faith, pursuant to Tenn. Code Ann. § 47-50-114(d). (Pl. Ex. 132.)

Defendants are subject to the court’s jurisdiction pursuant to this

statute although they are Minnesota citizens. Tenn. Code Ann.

§ 47-50-114(e). The Court finds that Defendants contracted with

RSSI as its sales representative to solicit orders for LGI’s

products, including SMRTPOWER, utility usage reports, and demand-

side analyses. Tenn. Code Ann. § 47-50-114(a)(2).

The Court finds that LGI acted in bad faith when it failed to

pay commissions to RSSI in a timely manner as required by the

statute. The Court’s calculation takes into account that RSSI has

already been paid $306,990 in commissions. Therefore, the Court

will multiply that amount by two ($306,990 x 2 = $613,980) to reach

statutory trebling of the commission amount.

Thus, the Court calculates damages as follows:


43

Cumulative Revenue of LGI to May 2006 $1,562,229CPK revenue May 2006 to April 2007 151,987

Total Cumulative Revenue $1,714,216

Commission to RSSI at 25% of revenue 428,554

Commissions already paid (377,113) (includes Feb. 2007 payment of $255,332)

Commissions owed $ 51,441

RSSI share of Jack-in-the-Box award $ 297,252 ($552,584 - $255,332 = $297,252)

Buffalo Wild Wings commission due $ 14,367

Loss of Revenue from cancellation of contracts $ 131,233

Trebled commissions (T.C.A. 47-50-114(d)) $ 613,980

Total Due $1,108,273

RSSI’s interference with CPK (23,429)

LGI’s June 2007 payment (87,003)

Grand Total $ 997,841

The Court finds that RSSI is entitled to prejudgment interest

on portions of the damages award. The amounts of various types of

damages are ascertainable by computation. Myint v. Allstate Ins.

Co., 970 S.W.2d 920, 927 (Tenn. 1998). The Court finds that an

award of prejudgment interest is fair under the circumstances of

this case to fully compensate RSSI for the loss of use of funds to

which it was legally entitled, and the Court does not make the

award of prejudgment interest in order to punish the Defendants.

See id.; Scholz v. S.B. Int’l, Inc., 40 S.W.3d 78, 83 (Tenn. Ct.


44

App. 2000). This is not a case in which an award of prejudgment

interest might be inappropriate. Scholz, 40 S.W.3d at 83. RSSI

has not been so inexcusably dilatory in pursing a claim that

consideration of a claim based on loss of the use of the money

would have little weight, nor has RSSI unreasonably delayed the

proceedings after suit was filed, nor has RSSI been compensated

otherwise for the lost time value of its money. See id.

The parties’ Work for Hire Agreement and its amendment did not

address the issue of prejudgment interest on a judgment obtained

following litigation on the contract. Tennessee statute provides

that, for all written contracts, the maximum effective rate of

interest is the applicable formula rate. Tenn. Code Ann. § 47-14-

103(2). The “formula rate” means:

an annual rate of interest four (4) percentage pointsabove the average prime loan rate (or the average short-term business loan rate, however denominated) for themost recent week for which such an average rate has beenpublished by the board of governors of the FederalReserve System, or twenty-four percent (24%) per annum,whichever is less[.]

Tenn. Code Ann. § 47-14-102(6). The “applicable formula rate” is

the greater of the “formula rate” in effect at the time or the

“‘formula rate’ last published in the Tennessee Administrative

Register prior to such time, pursuant to § 47-14-105.” Tenn. Code

Ann. § 47-14-102(2). Historically, the “formula rate” gradually

increased four percentage points between mid-July 2004 to the


4www.tennessee.gov/tdfi/rates/historical_listing_of_forumula_rate.html.

45

present.4 The current “formula rate” as of September 24, 2007, as

announced by the Tennessee Department of Financial Institutions, is

12.11 percent (12.11%) per annum.

The Court finds that RSSI is entitled to prejudgment interest

on unpaid commissions of $51,411 and lost revenue of $131,233 (for

a total of $182,644) beginning July 2004, after the Work for Hire

Agreement and its amendment terminated. Based on the historical

“formula rate” data available, the Court calculated an average

“formula rate” for one half-year in 2004 (8.71%), 2005 (10.37%),

and 2006 (11.73%). The “formula rate” was 12.25% for the first

8 3/4 months of 2007, and dropped to 12.11% on September 24, 2007.

The Court finds that RSSI is entitled to receive total prejudgment

interest of $73,450.58 on unpaid commissions and lost revenue

($7,788.10 in 2004; $19,747.81 in 2005; $24,654.10 in 2006;

$20,699.12 for the first 8 3/4 months of 2007; and $561.45 for the

week of September 24-30, 2007).

The Court further finds that RSSI is entitled to prejudgment

interest on its share of the Jack-in-the-Box award from December

2006 to the present (10 months), as LGI deposited Jack-in-the-Box’s

payment of the arbitration award in the LGI bank account on

November 28, 2006. (Pl. Ex. 94 Nov. 2006 bank statement.) The

“formula rate” was 12.25% until September 24, 2007, when it dropped

to 12.11%. Thus, the Court finds that RSSI is entitled to


46

prejudgment interest on its additional share of the Jack-in-the-Box

arbitration award ($297,252) of $29,820.33.

The Court further finds that RSSI is entitled to prejudgment

interest on unpaid Buffalo Wild Wings commissions ($14,367) from

January 2005 (one month after LGI started invoicing Buffalo Wild

Wings for payment) to the present. Using the same “formula rates”

noted above for the years at issue, the Court finds that RSSI is

entitled to a total of $4,950.45 in prejudgment interest ($1,489.86

in 2005; $1,860.03 in 2006; $1,561.63 for the first 8 3/4 months in

2007, and $38.93 for the week of September 24-30, 2007).

The Court does not award prejudgment interest on the trebled

commissions. Accordingly, RSSI is entitled to total prejudgment

interest on the judgment of $108,221.36.

IV. CONCLUSION

For all of the reasons stated, the Court finds in favor of

RSSI on the misrepresentation, breach of contract, and statutory

violation claims. The Court finds in favor of LGI on its claim

that RSSI breached the Work for Hire Agreement by interfering in

LGI’s contract with California Pizza Kitchen. When damage for

RSSI’s claims and LGI’s counterclaim are offset, the Court finds

that RSSI is entitled to a judgment of $997,841.00 in damages, plus

prejudgment interest of $108,221.36, for a total judgment of

$1,106,062.36. Defendants Leischow and LGI are jointly and

severally liable for these amounts.


47

An appropriate Order shall be entered.

__________________________________ROBERT L. ECHOLSUNITED STATES DISTRICT JUDGE


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